Build Your Strategy

The sooner you can begin to evaluate your retirement situation, the more time you'll have to invest. Start with drawing a picture of your retirement outlook and calculate your retirement number. Here are some guidelines:

Begin with the big questions.

Assume that your spending needs in retirement may not differ greatly from your needs today. Conventional wisdom indicates that retirement savings should equal roughly 85% of a working annual salary for every year of retirement. This would typically maintain your current standard of living.

Other factors will also affect your retirement number like your planned/chosen retirement age, expected lifespan and health care costs, expected Social Security benefits (which may be dependent on the state of the Federal government's Social Security program) and more.

Run the numbers.

Because there are so many unknowns, it may be useful to run different retirement scenarios to create a few different possibilities and end goals for your retirement savings. For example, if you are concerned about the uncertainty of Social Security, you might consider mapping out a scenario in which you will not receive Social Security benefits in retirement. The more realistic you can be about your retirement picture, the better you can plan for the unexpected events such as caring for sick relatives, long-term care expenses, or early retirement.

Start now.

The more you plan, the more you can prepare. Starting early can have a big impact on your success when saving for retirement. It is wise to start good savings habits sooner than later.

Use the Janus Henderson Retirement Planner to map out different scenarios.

Life is filled with milestones that remind us to reevaluate our portfolios. It's a prudent idea to revisit your strategy periodically as you're building your assets. Here are two key considerations for choosing your approach and keeping your strategy on track.

Asset location

When it comes to taxes, location counts

It's important to understand how accounts are taxed as well as how accessible they are over time. A creative mix of accounts maintains flexibility and can affect your strategy for meeting your current and future tax obligations. For instance, some accounts allow for growth until retirement age without the burden of taxation, but keep in mind that these assets are typically available only after age 59½ without penalty. Investments that generate frequent capital gains or income may be ideal for retirement accounts because their assets grow tax-deferred.

For more flexibility, non-retirement accounts could be a great place to store emergency funds and long-term stock investments. Emergency funds can be accessed without penalty and long-term stock investments when withdrawn, may be taxed at a potentially lower, long-term capital gains tax rate. You can also withdraw from these at any time, but reinvested income and distributions that live in these accounts may be taxed year-to-year.

Having a variety of account types can help you strategically withdraw funds in retirement to optimize the amount of taxes you pay. Learn about the different account types that Janus Henderson offers.

Consider the Roth IRA for tax-free withdrawal

Nearly all retirement accounts offer tax-deferred growth, but only a Roth IRA may be tax-exempt in that qualified distributions are tax-free. However, contributions to a Roth IRA are not tax deductible unlike a Traditional IRA, which is typically funded with tax-deductible contributions. Therefore, withdrawals from a traditional IRA are taxed as ordinary income.

Asset allocation

Risk versus reward

Asset allocation is arguably the most important decision you will make as an investor as it will play a large role in determining your portfolio returns. As you consider your investment mix of stocks, bonds, cash and alternative investments, be sure to keep in mind your tolerance for risk, such as concentrations of investments and time horizon. Investments have different risks and potential for returns. It's up to you to decide what your proper mix will be.

Why diversification matters

Overexposure to certain types of investments can cause a concentration of risk in your portfolio. For example, if you only invest in U.S. stocks, the risks in your portfolio will reflect those of the U.S. stock market and companies that you have selected. In other words, expect volatility from price fluctuations in the companies you own and broad-based economic factors that impact the stock market. Pay attention to duplications of equity types, such as a concentration of large-cap stocks throughout different accounts. If your funds appear to move together in one direction, you may consider diversifying to include equities that move contrary to another group.

Even bonds can react unpredictably, and prices may fall as interest rates rise, so be aware of where your assets lie. Over time, diversification can help you spread out the risks in your portfolio and potentially create an investment mix that attempts to avoid wild swings in performance.

Let us help

Planning your asset allocations can help you map out an allocation strategy that suits your risk tolerance.

A strong retirement plan that reflects your goals requires some regular review and commitment.

Review.

Creating time checkpoints helps measure progress towards your retirement goals. Many investors review their retirement plan on an annual basis, but any periodic evaluation will help keep your investments focused. When you review, include recent life changes into your plan.

Rebalance.

Adjusting your asset allocation every once in a while is normal. As market performance can impact the mix of assets you are invested in, you may want to review and re-balance your portfolio to maintain the asset allocation you originally intended. Rebalancing is also your chance to realign your portfolio as your outlook and risk tolerance change over time. For example, as you get closer to retirement and protecting your assets becomes more of a priority, you may decide to reallocate some money invested in stocks to more conservative investments.

Invest regularly.

Investing a fixed amount regularly is called “dollar-cost averaging,” or automatic investing. It spreads out your purchases over time, and may end up spreading out risk over the long-term. For example, making a large investment at a single time runs the risk of losing value if markets turn. Conversely, steady, consistent purchases could buy shares at times when the market is both low and high, and may realize more overall value that way.

Making regular contributions to your retirement accounts helps you accumulate retirement assets at various market cycles. To create good savings habits, apply the notion of “paying yourself first” by maximizing your contributions to various retirement plans. By staying committed to your retirement goals early and continuously, you’ll be better prepared for retirement.

Janus Henderson makes it easy to participate in automatic investing by allowing you to schedule the time and amount of regular purchases into your funds.